CPN 2Q2016 Earnings Note

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Market Price (7/29/2017): $13.74/share; ST-Target: $20/share; NIV: $56/share

Puzzlingly lowers top end of guidance amidst strengthening market
CPN didn’t beat our AEBITDA estimate of $408MM and reduced top end of guidance by $50MM. But, market fundamentals are clearly improving and weather has been generally cooperative. So, we continue to believe that CPN’s still well-poised to deliver strong returns for shareholders over MT. Also, in our opinion, in LT CPN’s story is about future of power and well beyond just macro effect of economy and commodity prices. We agree accelerated closure of coal-fired generation is coming, industry is moving more towards reliance on renewable energy, and improving natural gas prices are all tailwinds for ST-to-MT gain for CPN and credit metrics are solid. Strategically there’s little to criticize, but we’d like CPN to disavow share buybacks, and in improving fundamental market, we believe CPN’s hedging program is too aggressive. NT commodity prices appear to be strengthening, which we believe will largely continue. However, over ST-to-MT, we believe importance of heat rate will likely start to dominate IPP valuations. Environmental issues that continue to plague others present opportunities for CPN. We’d like to see CPN develop Glass Mountain Geothermal. We look for expansion of CPN’s retail business. We agree with CPN on its decision to close Clear Lake in TX.


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